September 25, 2013

How the Canadian who founded the world’s largest poker site almost lost it all

One spring evening five years ago, George Clooney mingled with 300 champagne-sipping guests on a massive yacht moored in the harbour of Cannes, France. The occasion was a charity event with the cast of Ocean’s Thirteen, and Clooney was putting in an appearance along with co-stars Brad Pitt, Matt Damon and Don Cheadle, as the sun set over the Mediterranean. On the fringes hovered a short man in his early 60s, seemingly unsure what to do with himself. He didn’t socialize or drink, and clung to the small group of people with whom he’d arrived. He was a little hazy on the pedigree of the celebrities around him. One attendee recalls, “It was like someone had taken their parents to a party.”

That fellow, Isai Scheinberg, was actually a distinguished guest. He sponsored the whole event through his online gaming company, PokerStars, and he was there to explore marketing opportunities with the cast, some of whom were poker buffs. The effort never went farther than a few charity poker tournaments, but the actors did gather around a poker table with the company’s logo printed on the felt for a quick photo. The picture hangs in the company’s lobby.

Strangely, when asked about the evening in question, a spokesperson for PokerStars said Scheinberg was never there at all, despite an attendee witnessing him onboard. If he did indeed make an appearance, it was a rare event. He preferred to remain holed up in his company’s headquarters on the occasionally dreary rock that is the Isle of Man. But PokerStars craved the cachet that celebrity spokespeople brought, as it helped to position the website as a legitimate business in the United States. This was important because the year before, the U.S. has passed the Unlawful Internet Gambling Enforcement Act (UIGEA), which prohibits financial institutions from processing payments related to “unlawful” online gaming. Poker had always been something of a grey area in the U.S., the country where it was most popular. Now its legality appeared even murkier.

Scheinberg was a masterful tactician, and he was prepared for something like this. He didn’t travel to America, and when he shuttled between the Isle of Man and Toronto, where he originally founded the company, he flew on a private jet to better avoid an emergency landing or unplanned diversion to an American airport, according to those who worked with him. (The company says he flew only once on a private plane along this route.) In the past, Scheinberg solicited law firms for opinions on the legality of online poker, and did so again after UIGEA. The law, he was told, didn’t apply to online poker. He was already of the opinion that existing laws only affected games of chance, like blackjack and roulette. In Scheinberg’s mind, and in those of his lawyers’, poker was a game of skill, much like chess, another game he was fond of. He saw no reason to stop serving U.S. citizens. But he did need to consider the handful of American executives he employed, and, leading up to UIGEA’s passage, asked them if they could stay with the company and forgo travelling back home, the consequence of challenging muddy U.S. laws. Not everyone was prepared to do so. But armed with his legal opinions, Scheinberg had made his decision: he went all in.

The repercussions of Scheinberg’s choice to continue dealing with U.S. citizens are still reverberating today. PokerStars became the world’s biggest online poker site overnight when its main rival, PartyGaming PLC, shuttered its U.S. operations in light of UIGEA. Its rise to the top is a largely untold story, one with Canadian roots. Scheinberg built his company, which now has 1,640 employees, with a combination of brains, audacity and, though he might not care to admit it, luck. That luck evaporated in 2011. The U.S. Department of Justice launched civil charges against PokerStars, branding its business illegal and accusing it of money laundering, and PokerStars was forced to shut down U.S. operations. But all may not be lost: cash-strapped state governments are letting online poker back into the U.S. PokerStars’ future now depends on the company’s ability to account for its troubled past in front of state regulators. And it will be all the more difficult with criminal charges hanging over Scheinberg’s head.

The headquarters of PYR Software Ltd. sits in an office building in the Toronto suburb of Richmond Hill. Next door, a rundown plaza houses a kebab shop and a pizzeria. PYR’s website says the company helps its “customers worldwide to retain industry leadership…while maintaining world domination in terms of market share.” The mission statement doesn’t mention that PYR has only one client: PokerStars.

Scheinberg founded PYR in 2000. It built the software to power his online poker venture. Its employees, numbering around 100, are still mostly responsible for the software that services the tens of thousands of players on the PokerStars site at any given time, about 60% of the market. The nondescript digs are befitting of its founder. Scheinberg has never given an interview, and only two photographs of him have ever been published. (If you plug his name into Google, the top image result is of someone else.) For a while, his desire for anonymity even extended inside the company. When PokerStars established headquarters in the Isle of Man in 2005, Scheinberg described himself to new hires as the chief technology officer. A former employee says during a job interview, Scheinberg never once let on he was the founder. Many people contacted for this article were reluctant to talk; some declined out of respect for Scheinberg’s privacy. The company would only respond to written questions through a spokesperson.

Raised in Lithuania, Scheinberg holds Israeli-Canadian citizenship and is fluent in Hebrew. He earned a master’s degree in mathematics from Moscow State University, and later moved to Israel where he served in the Israeli Defense Forces and fought in the Yom Kippur War. Owing to his technical mind, he ended up working for IBM in Israel before transferring to the company’s Canadian office and settling in Richmond Hill. Part of his leisure time was spent playing cards, and he travelled to Las Vegas in 1996 to participate in the World Series of Poker, pocketing $3,337. Scheinberg also played in card rooms around Toronto, sometimes with Daniel Negreanu, now the third-highest-ranking professional in the world.

Around that time, gaming was moving online. Total industry revenue, including poker, amounted to US$1.2 billion in 1999, with companies like Paradise Poker and PartyGaming leading the way. Poker was still a relatively obscure game back then; the number of players on Paradise Poker rarely exceeded 2,000. Scheinberg thought he could do better. He founded PYR, assembled a team of programmers (some from IBM) and recruited people who knew more about poker than he did. In late 2000, he sent an e-mail out of the blue to Terrence Chan, then a student at Simon Fraser University. It was just two sentences long: he wrote that he had an idea to discuss, and gave his phone number. Chan called, and learned Scheinberg had found him through a discussion group called rec.gambling.poker. Scheinberg, a reader of the forum, was impressed with the depth of knowledge Chan showed for the game. He explained he was launching a poker site and needed an expert consultant. Chan signed on and helped the programmers in Richmond Hill translate the intricacies of live poker into software, while still taking classes. To help manage operations, Scheinberg recruited one of his sons, Mark, who holds Canadian citizenship and grew up outside Toronto. At the time, Mark was a college dropout in his 20s travelling around Latin America. “He was pretty much being a beach bum,” Chan says. Scheinberg often insisted his website would beat the rest. “They seemed insurmountable,” Chan says, “but he was always confident and said if we have world-class software and world-class support, there’s no reason we can’t do it.” PokerStars launched on Sept. 11, 2001, and introduced cash games shortly afterward. Just like a traditional cardroom, PokerStars makes money by keeping a small percentage of the pot (up to 4.5%) on almost every hand played.

Word spread that PokerStars’ software was more reliable than the competition’s. “It was so swift,” says John Duthie, a player who went on to found a live poker tournament with PokerStars, “and it very rarely crashed.” PokerStars was geared toward serious players, eschewing the cheesy graphics employed by the likes of PartyGaming, which “was almost like a bingo site rather than a serious poker site,” Duthie says. At first, customer service was outsourced, but Scheinberg soon brought it in-house. He opened an office in Costa Rica, a country known for its gambling-friendly laws, and put Mark in charge. Chan moved to Costa Rica and found Mark to be a talkative, energetic boss who retained the carefree ethos of his travelling days. “He would go out and party with us,” Chan says, “but I think at some point when the company got bigger, he started being more aware of his image.” The company hired seven people in Costa Rica to answer questions and complaints, only one of whom knew anything about poker, so Chan spent two solid weeks giving a crash course. Taking control of customer service proved wise, as PokerStars’ competitors were either slow to respond or outsourced customer service to a firm where nobody knew much about the game. Finally, Scheinberg carved out a niche by focusing on tournaments, which offer better prize money and a shot at glory, on top of regular games. The site attracted a cult following and became the “darling of the rec.gambling.poker community,” as Chan puts it.

PokerStars’ big break came in 2003 at the World Series of Poker in Las Vegas. The event was largely the territory of poker pros, but online companies saw an opportunity. PokerStars held tournaments to send winners to the WSOP, where the buy-in was $10,000 each. The company spent $370,000 to send 37 players to Vegas that year, and while the cost was steep, ESPN planned to broadcast the tournament, which would provide television exposure for PokerStars. Chris Moneymaker, a mild mannered 27-year-old accountant from Tennessee blessed with the perfect name for a poker player, won a seat through PokerStars after paying $39 to enter a tournament. Few considered the gaggle of amateurs bumbling around in PokerStars T-shirts to be threats, but on the last day of the tournament, Moneymaker was sitting at the final table with seasoned pros. He beat them all and walked away with $2.5 million.

Thus began the poker boom. It had been building for a while, but Moneymaker’s arc from obscurity to multimillionaire convinced others the same thing could happen to them. “This was so perfectly, magically ideal for the target demographic,” says Nolan Dalla, the company’s former director of communications. The company began growing rapidly, and two years later Scheinberg established corporate headquarters in the Isle of Man, a self-governing British crown dependency best known for its zero corporate tax policy. PokerStars took over part of a sprawling building perched on a cliff overlooking the Irish Sea. (It eventually purchased the building last year, and the exterior still lacks any corporate branding.) Scheinberg then split his time between headquarters and PYR in Richmond Hill.

By 2006, PokerStars was the second-largest poker company in the industry, outmatched only by PartyGaming, which went public the previous year on the London Stock Exchange with an $8.5-billion valuation. Rumours surfaced in the British press that PokerStars, too, was considering an initial public offering and seeking a $3-billion valuation. Whatever plans Scheinberg had were scrapped when the U.S. passed the Unlawful Internet Gambling Enforcement Act in October. The legislation was largely driven by conservative politicians concerned about the potential destructive effects of online gambling. Leading up to UIGEA’s passage, PartyGaming’s stock plummeted. Scheinberg, meanwhile, was offering to double the money in new player accounts. PartyGaming then completely pulled out of the U.S., which had accounted for more than 80% of its revenue. Scheinberg’s legal advisers told him UIGEA only affected payments around already illegal forms of gambling. And because it could be argued poker was a game of skill—and not chance—it was not illegal to begin with under U.S. law. UIGEA, the company believed, changed nothing. With PartyGaming gone, his company became the biggest poker site in the world. But it wasn’t the only one to continue soliciting U.S. customers. Full Tilt Poker, based in Ireland, remained, and became the second-largest company after PokerStars. While Scheinberg’s decision looks shrewd, it was the result of exhaustive examination by gaming lawyers, and former employees say he is a conservative person by nature. Still, there was an irresistible momentum at the company. “It’s like if you’re running a marathon and you quit at the 25th mile. You wouldn’t do that,” Dalla says. As an American working in the U.S., Dalla was offered the chance to move to the Isle of Man around the time of UIGEA. He declined, and reluctantly left the company.

The following five years were a period of huge growth for PokerStars. The company expanded not only in the U.S., but also into parts of Europe, Asia, and South America. It was an aggressive marketer and spent heavily on spokespeople ranging from Mats Sundin to Jason Alexander. Tennis pro Rafael Nadal is currently the company’s poster boy, following in the footsteps of Boris Becker, both of whom were selected in part because of Scheinberg’s love of tennis. “He’d do anything to meet these tennis stars,” says a former employee. PokerStars also operates many live poker tournaments around the world, which helped to establish the brand in new markets.

By 2008, according to a former executive, Scheinberg sat atop an empire that churned out around $1 billion in revenue. But even when PokerStars published an account of its history to mark its 10th anniversary, there was not a single mention of the founder. He wasn’t highly visible inside the company, either. Scheinberg was so nondescript that when he did appear, “we used to joke he was the janitor,” says a former employee. Those who worked closely with him describe him as impersonal, obsessive about details, and in command of an impressive memory. He could pick up an intense discussion from weeks ago as if it just happened. As the company grew, he still browsed poker forums to keep tabs on what players were saying, and he would shift gears accordingly. “He would change an entire project at the last minute on the basis of what somebody said on the forum,” says a former employee. “The guy probably sleeps three hours a night because he’s literally all over the forum.” There was an understanding at the company to never do anything that somebody could complain about online, because Scheinberg would find out.

As Scheinberg’s personal fortune grew, he retained a modest demeanor and seemed to prefer spending time working, or walking along the shoreline. But as a manager, he enjoyed debate and playing devil’s advocate. During a job interview with an individual he had been trying to hire for some time, Scheinberg began by “slagging off every fucking thing I’d done,” the individual recalls. “He loved all this stuff.” Scheinberg and his son Mark, now CEO of the company, would get into heated arguments in front of staff, usually in Hebrew, while no one had a clue what they were shouting about.

“He’s the most demanding human being I’ve ever known,” says Steve Morrow, a veteran poker tournament director hired in 2002. Morrow moved to Costa Rica to serve as a poker expert, though he soon realized Scheinberg wanted him mainly for his name. “I truly believe he was more interested in my reputation for honesty than anything else,” he says. Building trust with players was crucial, and Morrow’s reputation helped PokerStars earn credibility out of the gate. But Morrow was uncomfortable with the arrangement, and butted heads with Scheinberg so often he tried to resign after five months. He ended up staying for one more year, and left when Scheinberg offered to renew his contract with a huge pay cut. Despite mixed feelings, Morrow doesn’t begrudge Scheinberg his success. “He did so many things right,” he says. PokerStars, which says it values Morrow’s early contributions, doesn’t dispute his account, but adds he was expected to be “very proactive” in communicating with players on poker forums, and was reluctant to do so.

Despite the success that came from continuing to operate in the United States, a low-grade paranoia about a crackdown by the American government permeated the Isle of Man. One former employee recalls being spooked after hearing so many American accents around the island’s tiny capital, called Douglas. In 2010, Daniel Tzvetkoff, one of the industry’s biggest payment processors, was arrested and charged on a trip to Las Vegas. Tzvetkoff, who processed for PokerStars, was a wunderkind from Australia who became a multimillionaire in his 20s, and owned a mansion and a fleet of cars, including a Lamborghini with a licence plate reading “BALLER.” Rather than face a lengthy prison sentence, he co-operated with authorities.

The U.S. Department of Justice had a very different view on the legality of online poker. With Tzvetkoff in its pocket, the DOJ struck in 2011, filing civil suits against PokerStars and Full Tilt, along with another company operating in the country called Absolute Poker. It also filed criminal charges against Scheinberg and Paul Tate, the company’s director of payments, alleging bank fraud and money laundering. Nine other poker company executives and payment processors were charged. The crackdown caught the industry off-guard, particularly because there appeared to be a push by some U.S. politicians to finally clarify the laws around online poker. The case alleged that because most banks would no longer process poker transactions, the three companies relied on middlemen to establish bank accounts using phony business names and funnel player funds through these accounts. One of these middlemen set up websites for his fake businesses, which purported to sell “everything from clothing to jewelry to golf clubs to bicycles.” Another claimed to sell environmentally friendly household products, and built a website featuring testimonials. Eight of the eleven men have since pleaded guilty to some charges. Scheinberg and Tate, who are not U.S. citizens, haven’t entered a plea.

Chad Elie was one of those who pleaded guilty. Elie was charged with disguising transactions for all three poker companies as payday loans and fees related to online clubs that offered shopping discounts, among other things. He also processed payments transparently for PokerStars by forging a relationship with a struggling bank in Utah. Elie originally decided to fight the charges and pleaded not guilty. Though he wasn’t an employee of PokerStars, he had an indemnification agreement with the company to minimize his liability in legal matters. Scheinberg, Elie says, was initially reluctant to honour the agreement. “There was a lot of arguing between me and him,” he says. “Some pretty bad text messages.” Scheinberg relented, and the company ended up paying millions for the defence, Elie estimates. A trial date was set (Tzvetkoff was to appear as the prosecution’s star witness), but shortly before it began, Elie changed his plea and fessed up to one count of conspiracy to commit bank fraud. The charge related to a bank account that handled transactions for all three online poker companies, but appeared to handle transactions related to online clubs.

Scheinberg was floored. “He’s mad to this day that I pled,” Elie says. Scheinberg sent an e-mail demanding an explanation, and insisted Elie could have beaten the charges. But Elie’s lawyers discerned the judge presiding over the trial was not sympathetic to the view that poker was a skill game, and during a mock trial, the jurors had trouble grasping the concept. Elie spent five months in prison and completed his sentence in June. He doesn’t deny that some payment processors deceived banks into handling poker transactions (he mostly blames Tzvetkoff), but insists he never intentionally misled anyone. Even with the bank account that led to his guilty plea, Elie characterizes it as a case of sloppiness. His account representative at the bank knew about the poker transactions, he says; it just wasn’t recorded in the documentation. “I should have had that signed off by them,” he says.

How much did Scheinberg know about the dubious practices used to serve American poker players? Elie, who describes Scheinberg as “very hands-on with every single thing,” says, “I don’t think he knew…I definitely would swear that under oath.”

But at least one PokerStars employee knew. Nelson Burtnick, a Canadian, served as the company’s director of payments until 2008, when he joined Full Tilt. Burtnick was indicted alongside Scheinberg and pleaded guilty in September 2012 to conspiracy to commit bank fraud and money laundering, and two counts of accepting funds related to illegal gambling, for his actions at both companies. “My superiors, other employees and I knew and understood that if we did not use payment companies that deceived their banking partners, the business would not function or operate,” he said at his plea. “Most U.S. business for both poker companies was fashioned this way.” Burtnick didn’t name his superiors.

PokerStars, through a spokesperson, disputes Burtnick’s statement. “Nelson’s statement does not mention PokerStars explicitly,” wrote Eric Hollreiser, head of communications, in response to e-mailed questions. “If he did mean to include PokerStars in that, then his statement is wrong. Furthermore his statement is incorrect about business not being able to function, because PokerStars has only processed credit cards with the correct coding for Internet gaming.” Hollreiser also wrote the company had contracts with its payment processors requiring them to operate transparently with banks. “When later on PokerStars became suspicious that these obligations were not complied with, the company moved to establish independent and transparent relationships with U.S. banks.” In the months following the DOJ’s allegations, PokerStars came off much better than its co-accused. Full Tilt had been partly funding itself with the money players deposited in their accounts. The business collapsed within months (the DOJ branded it a Ponzi scheme), and players couldn’t retrieve their funds. PokerStars, in contrast, kept player accounts and operating funds segregated.

In July 2012, a settlement was reached with the DOJ, Full Tilt, and PokerStars. Full Tilt surrendered its remaining assets to the DOJ. PokerStars forfeited $547 million to the government to be used to reimburse Full Tilt’s American players, and another $184 million to its foreign customers, bringing PokerStars’ total settlement fee to $731 million. As part of the agreement, the government turned over Full Tilt’s assets to PokerStars. In a weird way, PokerStars came to the aid of the DOJ. Players were furious about the crackdown, and blamed the DOJ for the fall of Full Tilt and the loss of their money. Scheinberg allowed the DOJ to save face, earned the goodwill of players, feasted on the remains of his primary competitor and dealt with the company’s civil suit—all without ever admitting to anything. The settlement also states that nothing contained in the agreement “shall limit” PokerStars in returning to the U.S. should online gaming laws change, a clause the company believes helps its case with state regulators today. In a separate agreement this past June, Mark agreed to turn over a further $50 million to the government, even though he was not subject to the indictment. In the settlement document, the DOJ alleged payments made to Mark by PokerStars during the period covered by the indictment are subject to forfeiture. Though Mark disputed that claim, he paid up anyway and admitted no guilt or culpability. Scheinberg’s criminal lawsuit is still ongoing. As part of the company’s settlement, he’s forbidden from serving in a management or director role at the company while he’s facing charges. He’s now a PokerStars Fellow, primarily advising on technology matters and on entering new markets.

The DOJ’s charges against him, and the company’s contention that it did not condone any deceptive practices used on its behalf, will probably not be tested in court so long as Scheinberg never steps foot in the country. But from his office in the Isle of Man, he’s pushing the company back to the U.S. with full force.

The federal government may have demonized PokerStars and its competitors, but many cash-starved states in the U.S. are taking a different approach. Three of them, including New Jersey, now regulate online gambling within their borders. Even before New Jersey passed legislation in February, which allows only the state’s land-based casinos to offer online gambling, PokerStars was plotting just such a re-entry strategy.

In December, it agreed to purchase the struggling Atlantic Club Casino Hotel for just $15 million. The acquisition would go through only if PokerStars received an interim casino authorization from the state. The fact the company could apply so easily was something of a coup. Companies that operated in the U.S. after the Unlawful Internet Gambling Enforcement Act was passed are banned by Nevada’s online gambling laws from operating in the state for five years. Other states considering online gaming, such as California, are also looking at so-called bad actor clauses. PokerStars says these clauses wouldn’t stop it from applying, and that it would also consider challenging the constitutionality of them. New Jersey, however, decided against the introduction of such clauses.

The American Gaming Association, the lobby group for the casino industry, filed a 26-page motion in opposition to PokerStars’ application. It was the first time the AGA had ever tried to stop a company from getting a licence. The AGA slammed PokerStars as a business “built on deceit, chicanery, and the systematic flouting of U.S. law.” PokerStars rejects the claims made in the submission, and paints it as an attempt to discredit a viable competitor. “Cynical mudslinging based on innuendo and, often, outright fabrications, must be seen for what it is—a desperate attempt to tarnish the most successful, customer-oriented, financially stable and secure online gaming company in the world,” according to Hollreiser.

New Jersey regulators stalled, and the Atlantic Club pulled out of the deal. PokerStars sued, arguing it had already pumped $11 million into the business to keep it afloat, but a New Jersey court allowed the Atlantic Club to seek new buyers. PokerStars’ first comeback attempt proved to be a costly failure, but it didn’t give up. Just a couple of months ago, in July, it partnered with the Resorts Casino Hotel in Atlantic City to offer online gaming in the state. That deal still needs regulatory approval, and while the AGA has been mum, its opposition to the Atlantic Club deal gives the state a lot to consider.

So far, the new partnership looks more promising, but PokerStars may have given its opponents more ammunition. The AGA previously raised questions about the extent to which Scheinberg had stepped back from the company as required. Since then, more details have emerged about his role. In the litigation over the Atlantic Club, the casino’s chief financial officer, Eric Matejevich, testified he had at least two phone calls with Scheinberg—one in October that opened discussions about the acquisition, and another days before the Atlantic Club pulled out of the deal. Scheinberg called to say his advisers told him the company stood a 90% chance of receiving the casino licence, and groused about how long it was taking. PokerStars responded that the phone call was “entirely within the defined scope” of his role.

The treatment of PokerStars mystifies analysts across the Atlantic. “Europe forgets the past,” says Warwick Bartlett, founder of Global Betting and Gaming Consultancy in the Isle of Man. “In America, you’re damned forever.” The online gaming industry could change dramatically if PokerStars is shut out from states that legalize gaming. Many established names are looking to cater to U.S. players and lock up the market, including Caesars Interactive Entertainment, which partnered with an Israeli gaming powerhouse. The glory years may already be over for PokerStars—and not only because it lost access to American players. New regulations in European countries, including France, Italy and Spain, allow people to play only against other citizens, not across borders, which has decreased the appeal of the game, along with revenue. Bwin.Party, which acquired PartyGaming, earned €185 million from poker in 2011, but €174 million the following year. “Poker has been the only online gaming vertical in decline,” say Gavin Kelleher, an analyst with Goodbody Stockbrokers in Ireland. That may help to explain why PokerStars is considering “casino style games” under the Full Tilt banner, branching beyond poker for the first time.

In the U.S., the odds appear to be against Scheinberg, but then he’s never had much use for odds. As a poker player and as a businessman, he puts faith in his abilities. “He’s the one person I’ve played poker against I cannot read,” says an industry insider. “Most people over time, I’ll get used to them. But Isai is impossible. He’s extremely analytical, and changes strategy on the turn of a coin.” It’s the approach of a guy who leaves nothing to chance. It’s no surprise that the corporate entity that owns the PokerStars brand is called the Rational Group. For Scheinberg, it’s all about skill. A couple of years ago, when a former employee expressed concern about the difficulty of re-entering the U.S. market, Scheinberg chuckled. “We’ll find a way,” he said.